Window-dressing – In football transfers, as in investment, it is the system that matters, not ‘gurus’

01/09/2016

Andrew Williams

Investment Specialist, Equity Value

As football’s annual summer transfer window swung shut 12 months ago, Manchester United’s £36m signing of French teenager Anthony Martial led The Value Perspective to ruminate, in Martial lore, on the idea of ‘paying for hope’. This year, arguably the most interesting move in the English Premier League, where total spending has smashed 2015’s record of £850m, could hardly be more different.

Relatively few headlines were generated back in July when Steve Walsh joined Everton as the club’s new director of football. The 51-year-old former PE teacher is hardly a household name but he played a huge part in one of the most unlikely sporting successes of all time – Leicester City defying odds of 5,000 to 1 (as we touched on in City haul) to win the Premier League for the first time in their history.

As Leicester’s assistant manager, Walsh had been responsible for bringing most of last season’s stand-out performers to the club for bargain-basement prices – at least in footballing terms. They included striker Jamie Vardy from non-league Fleetwood Town for £1m, playmaker Riyad Mahrez from Le Havre for £400,000 and winger Marc Albrighton on a free transfer from local rivals Aston Villa.

Arguably most significantly of all, Walsh saw something few others thus far had in a diminutive midfielder playing for Caen in the French second division. N’Golo Kanté never seemed to stop running and tackling last season, continued his great form during France’s run to the final of Euro 2016 and has now joined Chelsea for £32m – more than six times the fee Leicester paid for him just 13 months ago.

Predictably enough, Walsh has been hailed as ‘the man who cracked the transfer market’ – not the first time such a line has been bandied around in football. In recent years, the same has been said about Franco Baldini at Tottenham, Graham Carr at Newcastle and a number of other names we would never have been able to list were it not for an article by Rory Smith for ESPN entitled Football clubs play a risky game.

Cult of the individual

“There is just one note of caution,” Smith warns any Everton fans who may be growing excited about Walsh’s arrival at Goodison Park. “Football in general, and English football in particular, is in thrall to the cult of the individual. It is uniquely susceptible to guru thinking.” At which point, here on The Value Perspective, we found ourselves taking issue with just one word – “uniquely”.

For if football ever entered a competition to decide who or what was the most in thrall to the cult of the individual and guru thinking, the chances are it would find itself in the final up against the world of investment. Both love a good story and there are few stories they love better than a ‘guru’, who has apparently found a way to beat the system.

According to the ESPN article, Baldini, Carr and the others were “heralded as almost a guarantee that the days of expensive mistakes were over” – a possibility that would set any club chairman (or, of course, any investor) drooling. And yet: “In every single case, their reputation has fallen almost as fast as it rose. The magic never seems to last; after a while, the hits seem to dry up.”

Here – as strong advocates of a long-term view and the importance of distinguishing the skilful from the merely lucky – it seems pertinent, as we have in articles such as Your starter for tenure, to repeat an observation from Warren Buffet. It is only when someone has notched up a 10-year track record, he believes, that you can reasonably begin to ascribe their performance to some aspect of process or skill.

And just as Baldini, Carr and the rest were later revealed to be mere mortals, there have also been signs Walsh’s touch is not always golden. Of course Everton fans should be excited about what his arrival could mean for the club but they should not forget that the man who signed the Leicester hits of Kanté, Mahrez and Vardy also signed some expensive misses such as the £11m Andrej Kramarić.

Successes and failures

“The profit of his successes far outweigh the cost of his failures but it should not be ignored that he has, like everyone else, had failures,” observes the ESPN article – though, here on The Value Perspective, we feel that second part is too harsh. Without a crystal ball, failures are as inevitable in football transfers as they are in investment and the key point is the first part – that the successes outweigh the failures.

As we have argued in pieces such as Portfolio theory, investments should not be considered in isolation and value-oriented fund managers should simply be aiming for their winners, on average, to do better than their losers. To that end – and because they cannot know the future – they will look to build in a margin of error and enough diversification so their portfolios can absorb the inevitable failures.

To his credit – culminating in last season’s triumph – Walsh appeared to have pulled off something similar with Leicester. But did he achieve this because he is a guru who has somehow cracked the transfer market? The ESPN article is unconvinced, quoting instead the view of one of football’s most highly regarded and successful operators – the single-named Monchi.

What matters most, Sevilla’s director of football believes, is the system a club operates in the transfer market – a process that allows it to get more decisions right than wrong. In the case of Walsh and Leicester, the process for buying Kanté and Kramarić was exactly the same but while one was arguably the catalyst for a title-winning season, the other turned out barely a dozen times for the first team.

And yet, if the process was exactly the same for both, it would be wrong to view Kramarić as a ‘mistake’. A common pitfall is to assume all good outcomes are the result of good processes and vice versa. The best long-term performers in any endeavour that depends on probabilities – be it investment or sports team management – tend to be more focused on getting their process right than on results in isolation.

Looking ahead to the next stage of Walsh’s career, the ESPN article points out he is not arriving at Everton “with a list of players nobody else is able to access”. It adds: “He has his judgment, of course, but to use it properly he needs a framework behind him: the right people in the right places watching the right games in the right way.”

Switch “games” to “markets” or “assets” and, here on The Value Perspective, we hold the same view about investment and the importance of diversification, having a long-term horizon and sticking to your process in a disciplined way, whatever the weather. And we could not agree more with Smith’s final line in his ESPN article: “There is no such thing as a guru.”

Author

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm.

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